Volkswagen, the EPA, and Latter-day Indulgences

 

Volkswagen Group’s stock price has collapsed 30 percent since news broke last week that the company doctored engine management software to conceal tailpipe emissions exceeding EPA standards. Why would a global corporation risk an estimated $18 billion in fines and penalties to eke a bit more mileage out of a diesel power plant that is already remarkably thrifty and powerful? The figure below tells the story in one chart.

CAFE Standards

Corporate Average Fuel Economy (CAFE) standards were first imposed by Congress in 1975, in the wake of the Arab Oil Embargo. In 2007, the Democratic-majority Congress passed the Energy Independence and Security Act (EISA), mandating escalating use of biofuels such as ethanol, phasing out the incandescent light bulb, lavishing subsidies on electric vehicle manufacturers, and instructing the US Department of Transportation to ratchet the CAFE automotive standard to at least 35 miles per gallon by 2020 and to “maximum feasible levels” through 2030. EISA also allowed manufacturers to trade credits earned by exceeding CAFE requirements. The penalty for missing the target is significant: $5.50 for each 0.1 mpg shortfall multiplied by the total number of vehicles sold.

Looking at the chart, we see automotive fleet fuel economy (“Car CAFÉ Actual”) climbing significantly above the mandated level beginning in 2001-2002, occasioned by the gas price spike shifting consumer preference away from SUVs and toward more fuel-efficient vehicles. However, look further right and you will see a brave new world of impossibility looming for every conventional automaker.

Many people do not want to buy ultra high mileage cars. For a growing family or a busy salesman, attributes such as space, comfort, and affordability outweigh the prospect of a lower fuel bill. For 20 years, automakers met the CAFE standard by subsidizing the sale of lower-end economy cars in order to win the right to sell customers the vehicles they actually wanted to buy. Those days are over.

It is hard to contemplate the coming Big Auto Götterdämmerung without wondering whether former vice president and apocalyptic global warming prophet Al Gore is secretly steering US transportation policy. In order to remain solvent, all automakers will soon need to sell large numbers of all-electric vehicles or purchase indulgences—CAFE credits—from others who do. This mandated fact-of-life explains why Tesla, selling only 40,000 cars this year, is worth $33 billion, while Volkswagen Group, with 11 million vehicles sold, is valued at only $52 billion (and falling).

 

 

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  1. Ontheleftcoast Member
    Ontheleftcoast
    @Ontheleftcoast

    As I understand it, the EU focuses on CO2 because Global Warming. That’s relatively easy to lower on a diesel, and the new ones do it well. European subsidies and penalties promote diesel for that reason. But it’s harder to lower NOx and particulate emissions, but the European standards don’t weight those much. The EPA looks at all the above plus CO.

    VW was trying to game two somewhat conflicting systems; Tesla is custom built to game the US system.

    • #1
  2. Proud Skeptic Inactive
    Proud Skeptic
    @ProudSkeptic

    A friend of mine traveled through Europe in a rented diesel car a couple of years ago.  When he turned it in, he calculated the MPG at just about 70.  Incredible!

    I did a bunch of digging on the Internet to see why it was that we couldn’t have that here in the US.  The reason, of course, was pollution.  It seems that we are getting a taste of this phenomenon here in the US.

    Personally, I’ll go with cheaper gas, cleaner air, a little more CO2, and lower MPG’s.

    • #2
  3. George Savage Contributor
    George Savage
    @GeorgeSavage

    Ontheleftcoast:VW was trying to game two somewhat conflicting systems; Tesla is custom built to game the US system.

    The problem in a nutshell: To survive, car makers must comply with an ever more stringent EPA ratchet on emissions, stay on the NHTSA CAFÉ escalator, and offer  enough performance to entice a consumer to trade in a perfectly serviceable vehicle for new-and-improved.

    But what happens when new-and-improved is no such thing?

    VW tried skirting the rules, and we see how that worked out.

    Absent a new form of federal hope and change, the end of the conventional automobile is drawing near. It is hard to believe that this was not the intent of the leftists who crafted EISA in the first place.

    • #3
  4. Mark Wilson Member
    Mark Wilson
    @MarkWilson

    George Savage: Volkswagen Group’s stock price has collapsed 30 percent since news broke last week that the company doctored engine management software to conceal tailpipe emissions exceeding EPA standards.

    I’m amused that you chose to verb your own profession in such a negative context, when this is undoubtedly the work of engineers.

    • #4
  5. George Savage Contributor
    George Savage
    @GeorgeSavage

    Mark Wilson:

    George Savage: Volkswagen Group’s stock price has collapsed 30 percent since news broke last week that the company doctored engine management software to conceal tailpipe emissions exceeding EPA standards.

    I’m amused that you chose to verb your own profession in such a negative context, when this is undoubtedly the work of engineers.

    Well, since I am both a doctor and an engineer, I get to pick and choose my verbs. Next time I post on a medical topic, I will try to have the docs engineer something.

    • #5
  6. George Savage Contributor
    George Savage
    @GeorgeSavage

    Another observation from gazing at the chart above: The last time the CAFÉ ratchet was on a steep upward slope, the economy was in the doldrums and most new automobiles left a lot to be desired. Well, here we are again. I only hope the US gets a real conservative as president in 2017 to bail us out like Ronald Reagan did the last time around.

    Only, on this occasion, I think the need for deregulation trumps (I know, I know) tax rate reduction as the central policy plank needed to reignite economic growth

    • #6
  7. SEnkey Inactive
    SEnkey
    @SEnkey

    Deregulation trumps lowering taxes, agreed. At this point I’ll take a more business/people friendly environment over lower taxes.

    • #7
  8. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    The government and its enablers have always claimed that CAFE standards are responsible for the high efficiency of cars today.  That’s nonsense.  You can easily see on George’s chart that CAFE standards have generally lagged behind the actual fuel economy of cars.

    The first big bump in fuel economy came in 1979,  but it wasn’t a response to CAFE,  it was because of the oil embargo and the subsequent spike in gasoline prices.  This caused customers to demand smaller cars.  In other words,  it was a market response,  not the result of a government mandate.

    While the CAFE standard then stayed fixed for 18 years,  actual fleet fuel economy started to increase rapidly in 2000.  This time the shift was technological:  the advent of small inexpensive computers allowed us to start using adaptive timing,  computer-controlled mixtures, better fuel injection, etc.  The result was that engines became more efficient,  and options to efficiently increase horsepower became available in an inexpensive and reliable form.

    For example, turbocharging used to be very expensive,  and turbos couldn’t be used with high compression engines without causing detonation.  But with computers carefully controlling the fuel and air mixtures and amount of fuel injected into each cylinder,  that problem went away allowing us to use smaller engines with turbos to achieve higher horsepower more efficiently.

    Improvements in materials science and more improvements in computers and manufacturing allowed us to use higher compression ratios and  features like direct injection and cylinder deactivation,  which further increased horsepower and improved efficiency.  Again, this had nothing to do with government mandates.

    But then along comes the Obama administration and its desire to ‘fundamentally overhaul’ everything,  and they made the same boneheaded mistake a lot of ‘futurists’ or planners make – they look at current trend lines and assume they will continue forever.   So they basically mandated that fuel economy gains must continue on that same slope for decades.

    The problem is that the gains we’ve had came from a quantum jump in capability due to computerization.  We’ve reaped the low-hanging fruit from that now,  and just can’t go that much further with the internal combustion engine.   So now we have to move to hybrids, and then to all-electric to meet these crazy standards,  and possibly before we really know how to build such cars cheaply and efficiently.

    The result is likely to be that people won’t be able to afford the new cars,  or they won’t want them,  so they’ll stick with the cars they have.   That could possibly result in the fleet fuel economy average remaining lower than it otherwise would be if the government didn’t try to force the issue with legislation.  It could also severely damage the auto industry.

    The administration basically made a risky bet that we could figure out how to achieve these standards without wrecking the industry.  If they’re wrong,  we’re going to pay a high price for their hubris.

    • #8
  9. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    Audi’s (and therefore Volkswagon’s) problem is that they need the diesel cars to meet the fuel economy standards,  but their current diesels can’t meet new emissions standards for particulates.  So they are caught between two opposing regulatory mandates that work against each other.

    Audis in particular exist in a market niche of ‘driver’s cars’, which are expected to have certain features like All Wheel Drive, lots of options that add weight, and reasonably high horsepower.  Diesels have lots of torque and work well in an application that requires a ‘performance’ car that also gets good mileage.  So Audi made a bet on diesel technology and now the regulators have trapped them in a corner they can’t engineer their way out of.

    • #9
  10. Mark Wilson Member
    Mark Wilson
    @MarkWilson

    Dan Hanson: Audis in particular exist in a market niche of ‘driver’s cars’, which are expected to have certain features like All Wheel Drive, lots of options that add weight, and reasonably high horsepower.

    For some reason when I first read this I thought it said “unreasonably high horsepower” — and I assumed you meant it in a good way.

    • #10
  11. Ontheleftcoast Member
    Ontheleftcoast
    @Ontheleftcoast

    Dan Hanson:Audi’s (and therefore Volkswagon’s) problem is that they need the diesel cars to meet the fuel economy standards, but their current diesels can’t meet new emissions standards for particulates. So they are caught between two opposing regulatory mandates that work against each other.

    Audis in particular exist in a market niche of ‘driver’s cars’, which are expected to have certain features like All Wheel Drive, lots of options that add weight, and reasonably high horsepower. Diesels have lots of torque and work well in an application that requires a ‘performance’ car that also gets good mileage. So Audi made a bet on diesel technology and now the regulators have trapped them in a corner they can’t engineer their way out of.

    A world standard combining US mandates on CO, NOx and particulates, European CO2 standards and presto! by administrative fiat, internal combustion cars will be lousy to drive and more expensive. Followed by claims that the market has spoken in Europe and the USA, and  China and India will be the only ones with IC cars and trucks.

    • #11
  12. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    Mark Wilson:

    Dan Hanson: Audis in particular exist in a market niche of ‘driver’s cars’, which are expected to have certain features like All Wheel Drive, lots of options that add weight, and reasonably high horsepower.

    For some reason when I first read this I thought it said “unreasonably high horsepower” — and I assumed you meant it in a good way.

    Is there any amount of horsepower that’s unreasonable, really?

    • #12
  13. MJBubba Inactive
    MJBubba
    @MJBubba

    Two guys took a long road trip earlier this year in a VW Golf turbodiesel.   They drove through all lower 48 states:

    Drivers traveled 8,233.5 miles in 16 days and spent $294.98 on 101.43 gallons of Shell Diesel fuel during the trip.

    That works out to over 81 miles per gallon.   It is not a hybrid;  that is what it gets on the highway.   Pretty cool.

    http://www.automotive-fleet.com/news/story/2015/07/vw-golf-tdi-reaches-81-mpg-on-cross-country-trip.aspx

    The fact that this car lies to the government snoops is a bonus.

    • #13

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